Re-cap test Define the following terms, using examples to aid your answer External Cost/Benefit (2) Private Cost/Benefit (2) Social Cost/Benefit (2) How is the true social cost benefit calculated? (2) Why are are externalities a problem for our economy? (2)

Lesson Objectives All students will understand the importance of market failure and externalities Most students will be able to assess the implications of market failure Few students will understand the importance of market failure on the economy

Policies to deal with Market Failure in society Things to consider Public Goods Merit Goods Demerit goods Externalities Factor immobility Imperfect information Economic consequences of environmental change

How are issues addressed? Public Goods?? Merit Goods?? Are there problems associated with this?

Public and Merit Goods The issues around these mean that the government has to provide them. But of course this brings about problems: Inefficiency associated with lack of competition Huge costs involved and tax burden Potential trade-offs associated with public funding PFI’s – Private Finance Initiatives – partnerships between the public and private sectors on investments such as schools and hospitals Example pg 58

Demerit Goods: The Market Failure Demerit goods will be over-produced in a free market because the external costs is not internalised. So lets consider the possible solutions alongside that of externalities.

Externalities: The Market Failure When externalities are present, the free market will produce the wrong quantity. A negative externality will mean that too much of a product is produced – so what are the possible solutions? A positive externality will mean that not enough of a product is produced - so what are the possible solutions?

Externalities: The Market Failure A negative externality will mean that too much of a product is produced Market based system – taxes/Tradable permits (pg 60) Education Regulation A positive externality will mean that not enough of a product is produced Marketing campaigns (pg60) Subsidies

Marginal Costs and benefits How can the shift be achieved?

Impact of the tax

Immobility of labour –what can be done here? Geographical mobility Occupational mobility is the ability to change type of jobs.

Immobility of labour Geographical mobility Subsidies and grants to help relocation Occupational mobility is the ability to change type of jobs. Training programmes Minimum wage

Imperfect of asymmetric information Imperfect (lack of information) or asymmetric (buyer or seller knowing more than the other) information can also lead to market failure. Internet is dealing with this – huge exchange of information Comparison sites Customer review sites Social media

Look at exam style Qd pg62 create a plan for this answer in your note book